“Free trade serves the cause of economic progress, and it serves the cause of world peace.”
\(\qquad\) – Ronald Reagan, Nov. 1982
“Commercial relations draw states into a web of mutual self-interest that constrains them from using force against one another.”
\(\qquad\) – Oneal and Russett (1999)
Dominant Paradigm: Trade mediates preexisting conflicts of interest
Examples
Commercial Policy Objectives
Market Access Externalities
International Anarchy
Model
Results
Trade and peace are correlated, but not because trade causes peace
Definition 1: A subgame perfect bargaining equilibrium is pair of strategies, \(\widetilde{\boldsymbol{\tau}}^\star(a_i, c_i)\) and \(\omega^\star(\widetilde{\boldsymbol{\tau}}; a_j, c_j)\) such that \[ \omega^\star(\widetilde{\boldsymbol{\tau}}; a_j, c_j, \rho) = \text{argmax}_{\omega \in \left\{\text{accept}, \text{war} \right\}} \widetilde{G}_j \left(\widetilde{\boldsymbol{\tau}}, \omega; a_j, c_j, \rho \right) \] and \[ \widetilde{\boldsymbol{\tau}}^\star(a_i, c_i, \rho) \in \text{argmax}_{\boldsymbol{\tau} \in [1, \overline{\tau}]^2} \mathbb{E}_{f(c_j)} \left[ \widetilde{G}_i \left(\widetilde{\boldsymbol{\tau}}, \omega^\star(\widetilde{\boldsymbol{\tau}}; a_j, c_j, \rho); a_i, c_i, \rho \right) \right] \]
Government Preferences
\(a_i\) is measure of government’s sensitivity to interests of consumers
International Economy
Optimal Puppet Regimes
Conflicts of Interest
Proposition 3: \(\Gamma_i(a_i, a_j)\) is decreasing in \(a_i\), \(a_j\)
Proposition 4: In a bargaining equilibrium (Definition 1), the probability of war is weakly decreasing in \(a_i\) and \(a_j\).
Proposition 5: In a peaceful bargaining equilibrium (Definition 1), trade is weakly increasing in \(a_i\) and \(a_j\).
Proposition 4: In a bargaining equilibrium (Definition 1), the probability of war is weakly decreasing in \(a_i\) and \(a_j\).
Proposition 5: In a peaceful bargaining equilibrium (Definition 1), trade is weakly increasing in \(a_i\) and \(a_j\).
Proposition 6: In a peaceful bargaining equilibrium (Definition 1), government \(i\)’s trade barriers are increasing in its military strength. \(\tilde{\tau}_i^\star(a_i, c_i, \rho)\) is increasing in \(\rho\).
Preferences, Institutions, and the Democratic Peace
Shadow of Power in International Political Economy
Conflicts of Interest versus Bargaining Failures
Title Slide Image Credit: Charles Severin (American lithographer, born between 1808-1820; died ca. 1860). 1853 (creation). The American Expedition, Under Commodore Perry, Landing in Japan, July 14, 1853, Overall view. visual works; prints (visual works); planographic prints; lithographs. https://library.artstor.org/asset/SS35100_35100_35234600
Assumption 1: (costs of war are bounded) \(c_i < \kappa\) where \(\kappa\) is a postive constant defined in the Appendix.
Assumption 2: (agricultural sector sufficiently large)Consumption
\[\begin{equation} \label{eq:cMax} \begin{split} \max_{X_i, Y_i} & \quad X_i^\alpha Y_i^{1 - \alpha} \\ \text{subject to} & \quad P_i X_i + Y_i \leq w_i L \\ & \quad X_i = \left( n x_{ii}^{\frac{\sigma - 1}{\sigma}} + n x_{ij}^{\frac{\sigma - 1}{\sigma}} \right)^{\frac{\sigma}{\sigma - 1}} \end{split} \end{equation}\]Production
Revenue
\[\begin{equation} \label{eq:revenue} r_i(\tau_i) = n (\tau_i - 1) p_j x_{ij}^\star(\tau_i p_j) \end{equation}\]Lemma 1: If Assumption 3 is satisfied, then \(G_i(\tau_i; a_i)\) is quasiconcave on \(\tau_i \in \left[ 1, \bar{\tau} \right]\).
Lemma 2: \(G_i(\tau_j)\) is strictly decreasing in \(\tau_j\).
Best Responses Functions
\[ \tau_i(a_i, \tau_j) = \text{argmax}_{\tau_i \in [1, \overline{\tau}]} G_i(\tau_i, \tau_j; a_i) \] and \[ \tau_j(a_j, \tau_i) = \text{argmax}_{\tau_j \in [1, \overline{\tau}]} G_j(\tau_i, \tau_j; a_j) \]
Definition 3: A noncooperative equilibrium is a pair of policies \(\left\{ \tau_i^\star(a_i), \tau_j^\star(a_j) \right\}\) such that \[ \tau_i^\star(a_i) = \tau_i(a_i, \tau_j^\star(a_j)) \] and \[ \tau_j^\star(a_j) = \tau_j(a_j, \tau_i^\star(a_i)) \]
Lemma 3: \(\tau_i^\star(a_i)\) is decreasing in \(a_i \in (0, \bar{a})\) with \(\tau_i^\star(\bar{a}) = 1\).
Successful Regime Change
Foreign Imposition of Regime Change
Foreign Government’s Expected Utility for War
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